This earlier post that compares American International Group, Inc.’s business model to that of Enron Corp. makes an important point about the true reason that Enron collapsed.
The general public’s perception — fueled by the Enron Task Force and most of the mainstream media — is that Enron collapsed under the weight of a massive fraud. However, as the Enron Task Force’s abysmal record in court against former Enron executives reflects, the vast majority of Enron’s business operations were entirely legitimate outside of former Enron CFO Andrew Fastow’s relatively few questionable transactions that he arranged to enrich himself and a few of his close associates. But how did the public disclosure of Mr. Fastow’s relatively small financial schemes cause a company with a $60 billion market capitalization to break apart?

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In yet another stunning blow in a series of setbacks to the Enron Task Force, the jury in the Enron Broadband trial returned late this afternoon and advised U.S. District Judge Vanessa Gilmore that they had acquitted three of the five defendants on certain of the 164 counts and were hopelessly hung on the remainder of the counts against all five defendants. Here is Mary Flood’s Chronicle article on the outcome.

Scott Yeager, the former Enron Broadband strategic planning executive, was acquitted on the wire fraud and conspiracy charges, former Enron Broadband co-CEO Joe Hirko was acquitted on insider trading and money laundering charges, and former engineering executive Rex Shelby was also acquitted on the insider trading charges.

The jury could not reach an agreement on any of the counts against former Enron Broadband finance executives Kevin Howard and Michael Krautz. Judge Gilmore declared a mistrial on all of the counts — some of which related to each defendant — on which the jury could not reach a decision.

On one hand, it’s not surprising that the jury would be in disarray over their deliberations on the charges. To reach a decision, the jury had to leaf though 60 pages of jury instructions and answer more than 190 special issues about the guilt or innocence of five former Enron Broadband executives. Consequently, no wonder the poor jurors bailed out after three days of deliberations and three months of an often mind-numbing trial.

On the other hand, it’s hard to recall a white collar trial that turned out as badly as this one did for a prosecution team that thought getting convictions in this case would be a tap-in.

How did this trial veer so far out of control for the prosecution?

Well, to begin, the Task Force’s decision to throw 164 charges of mud at the five defendants to see what would stick turned out to be an unmitigated disaster. The jurors could not reconcile the voluminous allegations of wrongdoing with what they heard over three months of often idiosyncratic testimony.

Then, when the trial actually began, the over-confident Task Force prosecutors were placed on the defensive almost from the outset.

The first blunder of the Task Force during the trial occurred when prosecutors elicited false testimony from the government’s key witness, former Enron Broadband co-CEO Ken Rice.

Then, after Rice’s testimony was impeached dramatically during cross-examination, the prosecution compounded its error by calling a witness (Beth Stier) who testified that, based on discussions with the Task Force prosecutors before her testimony, she felt threatened by the Task Force prosecutors.

Later in the trial, another witness — Lawrence Ciscon — testified that he was threatened shortly before his testimony by prosecutors with a possible indictment if he proceeded to testify on behalf of the Broadband defendants. T

o make matters worse, toward the close of the trial, U.S. District Judge Vanessa Gilmore sharply rebuked an Enron Task Force prosecutor for asking a question on cross-examination of Broadband defendant Kevin Howard that at least violated the judge’s prior instructions to the Task Force prosecutors.

Finally, earlier this week, Task Force director Andrew Weissman took the unusual step of resigning as head of the Task Force while the Broadband jury was still deliberating amidst rumblings of prosecutorial misconduct within the Task Force.

Accordingly, at the end of the day, the case that the Enron Task Force thought was their strongest against former Enron executives turned into an absolute debacle. Although the Task Force’s mishanding of the trial certainly had something to do with that result, there are two more important dynamics that are actually more revealing of why the prosecution’s case went awry.

First, the Enron Task Force is facing what is often called among lawyers involved in high profile cases the “curse of the correct result.” The Task Force has always been better at demonizing Enron in the media and bludgeoning former Enron executives into highly-publicized plea bargains than actually proving its charges in court.

The scorecard after the Enron Broadband trial is that the Enron Task Force — in over three and a half years on the job — has prosecuted to trial seven former Enron executives and obtained precisely one conviction of a mid-level Enron manager.

Despite that rather unimpressive batting average, the Task Force’s far better public relations machine has effectively pounded into the public’s mind that the “correct” verdict should be a conviction in any Enron-related criminal case even before the case is tried. That was certainly the case in the Enron Broadband trial.

However, the public’s fixed opinions were not based on the testimony as it was presented in court. The general public did not see the witnesses testify, and the public had no way to assess the credibility of those witnesses. The public’s fixed opinions were based largely on propaganda about Enron, much of which the Task Force willingly facilitates.

We now know the story of the trial. The Task Force’s case was far less clear cut than the prosecutors suggested to the jury during opening arguments. The Task Force had to deal with the effect of its blunders described above, and the lawyers for the Broadband defendants put up a well-organized and effective defense. As is often the case, the prosecution was forced to rely on the testimony of witnesses who admitted committing crimes and benefiting from those crimes, and some had personal issues that reasonably called their credibility into question.

Thus, the jurors who actually heard the evidence in this case concluded that the Broadband defendants were not guilty or that the government had failed to carry its burden of persuading all the jurors that the crimes alleged had occurred.

This result is contrary to the “correct” verdict that the general public has about anything having to do with Enron, but blame that on the “curse of the correct result,” not the jurors. In my view, this jury that actually reviewed the evidence and heard the witnesses testify came back with a result that — although not perfect — is the correct one based on the evidence that was actually presented in court.

Finally, as has been noted many times on this blog, the result in the Enron Broadband trial stands for the dubious nature of the government’s policy of criminalizing merely questionable business practices.

As much as the government protests that true business crimes are deterred by vigorous prosecution of such transactions, the fact of the matter is that any reasonable interpretation of justice is strained in attempting to square the result in the Enron Broadband trial with the results in the Richard Scrushy case, the case of Arthur Andersen, the case of Martha Stewart, the sad case of Jamie Olis, the case of Dan Bayly, the case of William Fuhs, the DOJ’s handling of the Global Crossing case, the Tyco case, the Bernie Ebbers case and many others.

These highly disparate results are not the product of a rational deployment of our criminal justice system, and the carnage to the families of the businesspeople who are caught in this troubling cauldron simply cannot be reasonably dismissed as a “trade-off” of an imperfect system.

Meanwhile, respect for justice and the rule of law upon which the success of American society is largely based is continually eroded by the roulette nature of such prosecutions.

If we lose the public’s respect for justice and the rule of law, then, as Sir Thomas More asked Will Roper in A Man for All Seasons, “do you really think you could stand upright in the winds [of abusive state power] that would blow then?”

Words to ponder as the Task Force now turns to using admitted felon Andy Fastow as its key witness in the upcoming trial of Messrs. Lay, Skilling and Causey. That trial could well make the hard-fought Broadband trial look like a picnic.

This NY Times article reports that Dallas-based personal injury plaintiffs firm Baron & Budd is among three law firms that may be targets of a criminal investigation by the U.S. Attorney’s office of the Southern District of New York.
Documents that have surfaced in the chapter 11 bankruptcy case of G-1 Holdings (formerly known as the GAF Corporation), a manufacturer of roofing material, reflect that the debtor’s counsel has met with the U.S. Attorney in Manhattan during recent months and turned over records of interviews with former employees of three plaintiffs’ firms — including Baron & Budd — in which the employees admitted that they had coached potential asbestos claimants and witnessed efforts to influence doctors’ diagnosis of the claimants’ ailments.
As the article notes, the investigation is potentially troublesome for the plaintiffs bar because asbestos litigation has become a huge industry. A Rand Corporation study notes that almost three quarters of a million people have filed claims for asbestos-related injuries over the past 20 years, resulting in damages of over $70 billion as of 2002. Moreover, the huge unliquiated nature of future asbestos claims has been one of the primary causes of more than 75 companies, including large companies such as Bethlehem Steel, Owens Corning and W. R. Grace.

In this timely post, White Collar Crime Prof Peter Henning notes a recent Fourth Circuit decision that bears on an increasingly knotty issue in this post-Enron era of criminalizing business — that is, an employee’s waiver of the attorney-client privilege for statements made during a conference with an employer’s attorneys.

In this particular case, the employees contended that their employer’s lawyers led them to believe that they had entered into an attorney-client relationship with the employer’s lawyers so that the employer’s subsequent waiver of the privilege did not affect their personal right to maintain the confidentiality of their statements made to the lawyers. At the outset of the employees’ interviews with the employer’s lawyers, each of them received the following reassurance — er, I mean “warning” — from the employer’s lawyers:

“We represent the company. These conversations are privileged, but the privilege belongs to the company and the company decides whether to waive it. If there is a conflict, the attorney-client privilege belongs to the company. We can represent [you] until such time as there appears to be a conflict of interest, [but] . . . the attorney-client privilege belongs to [the employer] and [the employer] can decide whether to keep it or waive it.”

As Professor Henning notes, the second part of the above instruction is incorrect in that a client under a valid joint representation continues to hold the privilege and another party to that joint representation cannot waive it unilaterally. At any rate, after completing its investigation, the employer waived its attorney-client and attorney work product privileges in attempting to obtain a deferred prosecution agreement and avoid the fate of Arthur Andersen (see also AIG, Berkshire Hathaway and KPMG for recent examples of this dubious corporate trend).

At any rate, the Fourth Circuit rejected the employees’ argument that they had entered into an attorney-client relationship with the employer’s lawyers by reasoning essentially that a statement that the employer’s lawyers “can” represent the employees is not the same as actually representing them.

Thus, employees beware. Even though the assertion of the Fifth Amendment privilege in connection with an employer’s internal investigation will likely result in the employee being fired, the alternative could be far worse — that is, your employer giving prosecutors of questionable judgment your statements to use in prosecuting you for an alleged crime that you performed while performing your job for your employer.

The sad case of Jamie Olis is a stark example of the damage to employees’ lives and their families that can result from an employee unwittingly waiving his attorney-client privilege.